Child Benefit Changes: What They Mean for your Finances
In The Budget 2012 George Osborne announced changes to the child benefit cuts scheduled for 2013. We explain what these changes mean for your finances and whether there’s anything you can do to keep your child benefit.
If you had just got your head around the original plans to cut to child benefit, George Osborne’s latest amendments, unveiled in the 2012 Budget, may have left you wondering exactly where you stand.
It’s estimated that these changes will see around 750,000 families keep some or all of their child benefit payments – we examine the plans in detail so you know what to expect when the changes come in.
What’s changed?
Previously George Osborne announced plans to withdraw child benefit in full from all higher rate tax payers.
However, these changes were widely criticised as being unfair on single income families and introducing a benefit ‘cliff edge’ for those earning just over the higher tax rate threshold.
This is no longer the case, now, only those who earn over £60,000 a year will lose their child benefit entirely, while people who earn over £50,000 a year will see it gradually withdrawn depending on how much they earn.
How much will you lose?
If both you and your partner earn under £50,000 a year you will keep all of your child benefit payments.
If either you or your partner earn over £60,000 you will lose child benefit in full.
However, if you or your partner earn between £50,000 and £60,000 you will lose 1% of your child benefit payments for every £100 you earn above the £50,000 threshold – so for example if you earn £55,000 you will lose 50% of your child benefit.
The taxman will take earnings from your main job, any other jobs you have, rental income and anything you earn from savings and investments into account when they're calculating how much you should lose.
When do the cuts take effect?
The planned changes to child benefit will be implemented on 7th January, 2013.
The government has announced it will write to all higher rate tax payers set to be affected by the change in the autumn of 2012, with details of how much they'll lose.
Will my Child Benefit payments stop?
No, this is the confusing part; even if you earn over the £60,000 payment threshold your child benefit will continue to be paid as normal after January 2013.
Instead, if you’re a higher earner the government will take the equivalent value back through an additional Income Tax charge.
If you earn over £50,000 this additional Income Tax charge will be equal to 1% of your child benefit for every £100 you earn above £50,000.
If you earn over £60,000 this additional Income Tax charge will be equal to your entire child benefit entitlement.
If both you and your partner earn over £50,000, the additional Income Tax charge will be applied to whoever earns the most, regardless of who the child benefit is paid to.
What if I’m separated from my partner?
If your ex-partner earns over £50,000 but you receive child benefit for your children you will be permitted to keep the payments in full (providing you earn under the £50,000 threshold).
Equally if you earn over £50,000 but have separated from a partner who claims child benefit for your children you will not have to pay the additional Income Tax charge.
If you and your partner separate after the change takes effect you will no longer be liable to pay the additional Income Tax charge. This will take effect from your date of separation, rather than the end of the tax year – so you will need to inform HMRC accordingly.
Can I decide to stop my child benefit payments?
If you want to avoid the additional Income Tax charge, or don’t want your partner to have to pay the tax because you receive child benefit, you can opt to stop your child benefit payments by notifying HMRC.
If you do this you should still complete a child benefit application if you have any more children, even if you don’t want to claim child benefit for them.
This is because your child benefit entitlement affects whether you qualify for National Insurance credits and could affect whether you will be able to claim a full state pension.
For more information about National Insurance credits visit the HMRC website.
Is there any way to avoid the Income Tax charge & keep child benefit payments?
The only way to reduce the amount your additional Income Tax charge you need to pay while keeping your child benefit is to reduce your taxable income.
This can be done by making additional payments into any personal pension, or by purchasing childcare vouchers; both of which qualify for tax relief.
However, while the original child benefit cuts would have seen higher rate tax payers just over the threshold lose thousands of pounds worth of income, the gradual charge applied through the additional Income Tax charge makes this a much softer and gradual process.
Consequently the benefit of paying extra into a pension or purchasing childcare vouchers are less pronounced than before (though potentially still worth doing).
For those that earn between £50,000 and £60,000, paying an additional £100 into your pension each month will only equate to a 1% reduction of your child benefit via the Income Tax charge.
If you don’t already pay into a pension, then this could be another incentive which could make saving for your retirement more appealing. Read our guide: Should I get a Pension? for more help deciding your best options.
Equally, if you are paying a considerable amount in childcare costs, purchasing childcare vouchers would again see you face a smaller additional Income Tax charge as well as benefitting from the other tax perks available with childcare vouchers.
Read our guide How to Get Help with Childcare Costs for more information.
Could registering as a company help me keep child benefit?
Depending on your circumstances, terms of employment and the additional Income Tax charge you face, registering as a private limited company could help you avoid the upcoming child benefit changes.
This essentially involves creating a private limited company to cover your work, paying yourself a minimum wage salary and declaring the rest of the money you earn each year as a dividend.
However, while this appears to be an ingenious way to avoid paying higher rates of tax it is only really a viable option for the self employed, freelancers or consultants not directly employed by a single company.
If you are a full time employee of a single company with a fixed annual salary this just isn’t an option, and is in fact illegal.
Even if you do fit into the right employment category, registering as a private limited company and altering your personal tax liabilities so drastically is not an easy option and should only be done with the aid of a qualified accountant.
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Responses (20)
HMRC website guidance on adjusted net income indicates that dividends are counted towards income for the purpose of the child benefit tax charge.
Hi I've been trying to find out more info on this and am awaiting response from my accountant. I've been a limited company for 7 years now and have wondered how the salary/dividend payments affect child benefit. We've just had our first child and are not sure what to do?
Obson is correct, dividends from investments would count towards your annual income.
Niaz, I think you're best waiting to hear back from your accountant, HMRC have informed me that child benefit payments will be based on your annual taxable income, so it would depend whether salary/dividend payments could be deducted from this figure.
Still waiting to talk to accountant this week but am assuming that the total income will count as my turnover. So if I have eg a monthly invoice totalling £5k inclusive of payment and expenses, over the year that's £60k and means no benefit! That's what I'm expecting!
Limited company profits should not make an impact on your child benefits as far as i am aware. It is purely based on what you as an individual receive such as salary/dividends. If it was sole trader/partnership it would be on your profit before tax.
Does untaxed income count eg ISA interest
Hi David, it's you taxable income that counts, so untaxed income from ISA interest wouldn't be included.
what about overtime and bonus ??//
Hi Gordon, the assessment will be made on your total annual taxable income, so this would include your overtime and any bonus payments.
When you say total taxable income, is that the total gross income from P60?
and why can both parents earn £49.999 and not be affected...this is a sore hit to most families that dont have spare cash and rely on every pound that comes into the household!!!
exactly ... Its a sad thing for one parent who stays back to take care of family and the other one strives for higher salary to make up the deficit !
Hi Both, I expect that you two are not the only people who feel this way about the new system, perhaps you'd like to kick start a debate on the topic and see what other money.co.uk members think of the changes or perhaps discuss how they could be made fairer?
I think that people wether in a couple or single parent that earns over 50,000 should have benfits cut as surely in this day and age u can survive on 50,000 and if you can not then may be the lifestyle you lead should be cut back on. There are so many families out there that are working but that can only pay their bills and that dont have any thing left over to do any thing on weekends so why should people that earn alot of money have more money from the goverment!
That is exactly the point I would make, aaron, thank you.
I think most people are complaining about the unfairness of the rule as its based on individual income rather than combined.... And also the fact that if you are separated and not taking the responsibility will ensure your income is not taxed where are if you are in a committed relationship , you get penalized ?
It would seem so, sbp!
Those earning 50k plus as a couple though have paid more tax than others, and cb is the only benefit they get back. Also no help towards housing, bills etc means they can sometimes be worse off than those earning much less.
I totally agree, my husband earns just over the £60K, but commutes to London from Kent at a taxable cost of £4500 PA, this is the only benefit we have ever claimed as a family and it is unfair that we lose this benefit yet couples who earn jointly so much more and have more spendable cash keep the benefit. It is a totally unfair cut, they want to promote family life yet they are ruining it. People think those that live in the south east are so well off and rich but we are not, house prices are higher, along with most other things here including transport etc. to earn £60k in the south east is not a lot to sustain a family, mortgage, bills etc. it sucks
I agree , we have never claimed a bean from the government only this. My husband works from 3 in the morning until 8 at night, he pays 40 % tax on his wages and this goes to all the people out there who just want to sit on there back sides and take of the government. It completely makes a mockery of all the hard working people out there. This government is a joke. If you never worked and rely on handouts from the start you will be ok....
I agree Alison my husband earns over 60,000 we now have no family allowance now which I used to buy all kids school uniforms and clothes. I have now had to get a full time job which I couldn't do before as it was too difficult to arrange childcare. Now both are in full time school I am working so I can buy my kids clothes but most my wages are paying for childcare I work in a school but have to pay 7.50 a child each night for them to be in childcare for 10 mins as my job only runs over there finishing time by ten mins it sucks I m now wandering whether it's worth me working at all now.
I totally agree. My husband earns just over the 60,000 and has to pay higher rate tax and the huge cost of commuting to London. I am angry that as a mother who gave up her career to bring up her children, I am being penalised for that decision! A year or so ago David Cameron was talking about supporting the housewife who stayed at home to provide a nurturing and stable home environment for her children. It seems to make sense for my husband to change his demanding job to a more local lower paid job and for me to do the same, that way we could still earn the same income jointly and keep our child benefit! But what benefit would it be for my children being packed off to child minders and after school clubs!! This individual income decision is ridiculous!!
I dont agree with the whole system people sat on their backsides getting benefits then get free childcare to go and spend their benefits. It does make my laugh though hearing so many of you complaining though about your other half earning £60k+ and getting nothing and its a struggle. Me and my missus earn less combined i work full time and she works 3 days a week. We pay for childcare and still do ok so i think we all just need to get on with it.
The completely immoral thing is I know so called self employed including Accountancy Partners who actually earn hundreds of thousands per annum but because they can manipulate their income and pay the majority as a dividend they will not only keep the benefit, get higher tax relief on mortgages for their mansions and pay 10% tax on their income. How the hell is that fair against those on PAYE earning a fraction of what they earn. Wake up Government, civil servants and HRMC!
Softer or not, the changes still seem to be grossly unfair to the single earner of over £50,000 in a married partnership where the partner is "unemployed". If an employer could be persuaded to reduce the earner's salary beneath the threshold and pay the balance to the "unemployed" partner as a childcare or personal assistant allowance, would this be illegal? After all, it seems two partners each earning £49,000 are still exempt from reductions of allowance or increased taxation. This is unjust in anyone's language, surely. Dyknor
it also does not take into account that a couple earning £25,000 each would still take home a bigger amount than a £50,000 single earner couple . so why not calculate on combined income ?
That would make better sense of it.
Even though a person earns more,he is paying 40% of his income as TAX to the govt.and finally he is earning sumthing which is equal to a person earning a non taxable income.Did any one of you think about this?? so ideally the person paying more TAX should receive CHILD CARE BENEFIT as he is losing most of his earnings thro TAX unlike the others who enjoy these entitlements whithout paying TAX.Hope this would create a thought on everyone!
And even more if its a single earning family who earns a non taxable income,he enjoys whatever he earns to the fullest without paying tax,as well as the child benefits without paying anythng to the GOVT..Then whats the purpose of paying TAX to the govt? its only from our contributions we are getting in the form of benefits..so ifs been scaled it should be for everyone. Hope I am clear
I have two children, receive no maintenance from their father (self employed get out clause) my new husband earns 59K but has three children from previous marriage which he totally supports so 25% of his income goes to his first family plus spousal maintenance, his ex wife household income will bring in more than us if you count the maintenance/s she gets and she will continue to be eligible for family allowance, whereas I will not be eligible to get it for my children yet we will have a much lower income availability, it seems very unfair the way it has been worked out and that it hasnt been worked out on household income. Will they take into consideration maintenance income and deductions? I guess not, I do not see how this system is fair.
i have just moved in with my partner who recieves child benefit for her daughter. I earn over 50k but am not the father of the child. Will i be taxed on my income for my new partners child benefit?
Looks like it. I'm in the very same position.
its robbery. my girlfriend and her ex partner take full financial responsibility for their daughter and i get penalised for it.
My salary is £50945. If I deduct my personal allowance of £8100 this brings me under the £50,000 threshold? Which figure is used?
My partner is pregnant with our first child. Is it possible to stop them paying us child benefit (I earn 51k, her 8k) when child arrives? Do we just not apply for it or is it paid automatically? We would rather just not receive it at all
Hi Skeebo,
If you take a look at this short guide it will run through your options:
http://www.money.co.uk/article/1009524-child-benefit-cuts-your-options.htm
Skeebo, I would keep your 90% and let HMRC claim the 10% back through SA. You will only lose 10% since you are only £1k over he threshold.
It would be good if one of the political parties in opposition could gather the votes on the 1 million or so affected single earning families behind them.
This make wake a government up that talks about family life and stability and then seeks to destroy it at every turn!!
Can anybody tell me why the government are cutting child benefits for those families where ONE individual earns over 50k and for other families where both partners earn under 50k, ie 49k get to keep it? I would like to meet the mathematician who worked that one out! The best way to make a saving in 2013 is to get divorced. Again, how can decisions like this be justified? Firing from the hips comes to mind!
If your partner earns over £60k and you have elected to keep the child benefit will HMRC charge interest on the claw-back at self-assessment?
What is the impact of the fact that this charge is only applying from January 2013, ie with only about a quarter of the tax year left? Does it mean that for 2012/13, the adjusted net income is calculated in the usual way, giving rise to a percentage reduction, but that ONLY the child benefit payable from January 2013 to 5 April 2013 is subject to the charge?
Hi I wonder if anyone might know the answer to this query please? I have been separated from my ex-husband for the last 10 years. We have joint residency of our child. For the last 10 years ex-husband has been receiving the Child Benefit but it appears he has now opted out of receiving it because of the amount of money he earns. Is there any chance that as I have a very low income I might instead be able to receive the Child Benefit?
apparently only the main carer can claim, so if you have joint custody 50/50 then you should be able to claim.
Why dont this goverment target people that get CB and there child is not even in this country>>>> I work, my wife looks after the kids we have just lost £1300 a year, I pay 40% tax so they think stopping CB is justified. This goverment have lost the plot completly.
the two eldest sons of mine.
The eldest earns above the limit just & his wife, my d-in-law does a wonderful job bringing the children up. loses there famly allowance.
The younger son & his wife both earn near the limit & they keep the family allowance.
Now wheres the sense or fairness in this system ?.
This year has been a good year for my earnings. £62000 probably by April. My job is coming to an end and i am being taken off shift work so my gross pay will reduce to about £40000 next year. I have 3 kids so not only am I losing my well paid job I am also going to lose £2500 in child benefit. Can I dispute my case with HMRC and perhaps claim some child benefit?
I would keep claiming it and when it comes to the tax year they should take this into consideration
My argument is the people who are agreeing with the GOVT, and would bet my life savings that these are people who are both earning good salaries but are under the threshold of the tax exempt. I do not agree that one person on the household could earn £65000 a year and loose the child benefit, but a couple earning say £45000 each (£90000 total) gets to keep it. There would soon be an uproar if the government said it was a combined household of £60000+
